The Luddite fallacy

2011 marks the 200th anniversary of the Luddite movement. 2011 is a fitting year to commemorate them as it has also been a year of popular protests with the “indignados” in Madrid, the recent attempts to occupy Wall Street and the St Paul’s protest camp in London Today’s protesters could learn a thing or two from the Luddites; . They certainly knew how to create a lasting brand. Will we be talking about the “Indignants” in 2211? Something about Luddites has captured the public imagination for the last two centuries.

Ned Ludd, the man who gave his name to the movement was a, a sort of Robin Hood-like figure among the protesters. There had been a young apprentice called Ludd or Ludham from Anstey near Leicester. Admonished by a superior for shoddy workmanship, he took his anger out on two frames for knitting hosiery, wrecking them completely. Word got around. After that whenever a machine was destroyed someone would say, “Ludd must have been here.” This is how a mythical leader was born and he became a source of inspiration for the protesters.

The Luddites emerged at the time of the Napoleonic Wars. The industrial revolution was in full swing. It should be pointed out that they were not opposed to technology per se; many were highly skilled machine operators in the textile industry. What they objected to was the automated looms that could be operated by cheap, unskilled labour, with the loss of jobs for many skilled textile workers. On March 11,1811, in Nottingham, a demonstration of textile workers demanding more work and better wages was broken up by the army. That night the disgruntled workers went to a nearby village and smashed up textile machinery. The movement spread rapidly throughout England in 1811 and 1812 with Yorkshire and Lancashire as two hotbeds of revolt. Mills and factory machinery were the typical targets of these handloom weavers. They publicised their actions in circulars mysteriously signed, “King Ludd.”

For a short time the Luddites created panic in the British establishment and they even clashed in battles with the British Army. The Luddites would meet at night on the moors surrounding the industrial towns, practising drills and manoeuvres. They were also into cross-dressing. However this seems to have been a way of disguising themselves. They often enjoyed local support, but once the government decided that they posed a serious risk and decided to repress them, their days were numbered. Machine breaking became a capital crime in 1812, legislation which was opposed by Lord Byron, one of the few prominent defenders of the Luddites. In order to suppress the movement mass trials were held resulting in many executions and penal transportations. By around 1816 the Luddites were a spent force.

The Luddites had clearly tapped into a common feeling. The nightmare vision of a world in which technology has eliminated human productive labour has been around since the early years of the Industrial Revolution. Automated production lines, computers and industrial robots have only reinforced this feeling. Each generation believes that the latest technology will be the one that eradicates employment. I tend to be very sceptical of economic populism and contrary to these populist beliefs, there is scant evidence to support the claim that technological development is responsible for rising levels of unemployment in the medium to long term. But these bad ideas keep coming back to haunt us. Whenever there is significant long-term unemployment, machines get the blame.

These fallacies are regularly trotted out in the media. Earlier this year Jesse Jackson Jr. lamented the dangers of the iPad, wondering what would happen to all the jobs associated with paper:

“A few short weeks ago I came to the House floor after having purchased an iPad and said that I happened to believe, Mr. Speaker, that at some point in time this new device, which is now probably responsible for eliminating thousands of American jobs. Now Borders is closing stores because, why do you need to go to Borders anymore? Why do you need to go to Barnes & Noble? Buy an iPad and download your newspaper, download your book, download your magazine,”

And this summer President Obama was on NBC News trying to explain why companies weren’t hiring:

“There are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM, you don’t go to a bank teller, or you go to the airport and you’re using a kiosk instead of checking in at the gate. So all these things have created changes. . . .”

George Bush was rightly criticised for many of the things he said, but I find it shocking that a President who is constantly praised for his stunning intellect could display such wilful economic illiteracy. Actually I’m not shocked at all by politicians spouting this kind of nonsense. Indeed, Obama may well be aware that it is bullshit, but is trying to make an appeal to populism. Either way it’s depressing that this is the man responsible for economic policy in the world’s most powerful economy.

A dynamic economy will see radical changes. This is what Joseph Schumpeter called this process creative destruction, the transformation that accompanies radical innovation. I did a piece about creative destruction in the financial sector in 2008. It has to be said that there has been precious little of this since the onset of the current economic crisis. Creative destruction has been around since we started inventing tools. The printing press was bad news for those who produced manuscripts. This process has been on steroids since the industrial revolution. Agriculture is a prime example. In 1900, nearly forty of every hundred Americans worked in farming to feed a country of ninety million people. A century later, it takes just two out of every hundred workers. There are many more examples:

There has been massive destruction of employment. There should be no more than five people working in the whole world! But as economist John Kay has pointed out, in the two hundred years since the Luddites first went around wrecking machinery productivity has increased more than fifty-fold. So we don’t have 98% unemployment; we produce fifty times as much.

We need to see the interconnectedness of all this; these ongoing processes cannot be understood in isolation. Resources no longer needed to feed the nation have been freed to meet new consumer demands. Over the decades, workers no longer required in agriculture moved to the cities, where they became available to produce other goods and services. Economist Walter Williams has a better grasp of economics than Obama and Jackson Jr.:

Certain jobs are destroyed by technology. You’re right, but many more are created. Think about it. If 90 percent of Americans still had been farmers in 1900, where in the world would we have gotten workers to produce all those goods that were not even heard of in 1790, such as telephones, steamships and oil wells? We need not go back that far. If there hadn’t been the kind of labour-saving technical innovation we’ve had since the 1950s – in the auto, construction, telephone industries and many others – where in the world would we have gotten workers to produce things that weren’t heard of in the ’50s, such as desktop computers, cell phones, HDTVs, digital cameras, MRI machines, pharmaceuticals and myriad other goods and services?

Creative destruction actually makes societies wealthier, by putting scarce resources to more productive uses. The savings from higher productivity don’t just go to the evil capitalist owners. They lower costs of doing business. In the short term this may mean higher profits. However, new competition tends to lead to lower prices as firms compete with each other to attract consumers. These consumers benefit from a higher standard of living as they have to work fewer and fewer hours to earn enough money to buy food, shoes or a car. It is technology that brings us a higher standard of living. It isn’t just the rich who get cheaper stuff. And I don’t know about Obama, but I love the convenience of using an ATM whenever I feel like it.

The problem is the time lag. While the disruption of the labour market and the destruction of businesses are immediate and very visible, the benefits from creative destruction are in the long term. As a result, societies there will always be a temptation to try and block the process of creative destruction, implementing policies to resist economic change. These attempts will almost always have a deleterious impact on the economy as inefficient producers, who should have gone out of business, hang around at a high cost to consumers or taxpayers. It prevents the shifting of resources to emerging sectors. The tragedy is that by trying to hold back the tide, you do not avoid pain. The ultimate cost of these misguided policies is stagnation, job losses, bankruptcies and a lower standard of living.

I don’t know what will happen in the future. The Luddites and their intellectual heirs may simply have been premature in their dire predictions. Will job creation match job destruction in perpetuity? With robotics and artificial intelligence set to advance rapidly this century, even many skilled jobs could come under threat. But I believe that jobs are created by what economist Julian Simon called the “ultimate resource” – our natural human resourcefulness and ingenuity. Human wants are insatiable -people always want more of something. This is what will create jobs in the future – jobs that we cannot even conceive of now.